Friday, February 08, 2008

Visualizing the market's strength

I am constantly searching for new ways to help me visualize the health of the market. I recently posted about my Combo MACD indicator and found it helpful in identifying points of price exhaustion.

Today I'm going to present an indicator that is inspired by the "Market Monitor" methods of Pradeep Bonde at I don't know exactly how Pradeep uses his method. All I know is that it is based on counting the number of stocks that are a certain percentage above or below the recent low or high.

The indicator I show below was calculated by finding the percentage of stocks that are 15% above their lowest level in the last thirty days and then subtract that value from the percentage of stocks 15% below their highest level in the last thirty days. The result is a measure of the strength of that index. A high number means that there are more stocks going up than going down and vice versa for a low number. I also show the same indicator using using higher percentage moves over longer time periods and also using the weekly bars instead of the daily.

The first chart is that of the Russell 1000. I always like to focus on the triple bottom that ended the great bear market of 2000-2002. Look how the strength of the market increased with each successive low and also notice how powerful the move up was after the third bottom. What I find interesting about today's market is that we are very near the extreme levels of 2002 and we have yet to see a large counter-trend bounce. We are also testing the recent lows without an increase in the negative readings of the indicator.

The chart and market strength indicator of the Nasdaq 100 is given below. Notice how we hit even greater extremes that rival those of the 2002 lows. Is this the end of a bear market or just the beginning? I'm not sure but either way, I'm playing for a bounce in the short term.


David said...

I am a member at Stockbee and find your MM Charts very interesting. Could you discuss your software and setup/formulas?


Paul Stiles said...

Hi David,

I'll put together another chart that shows how it is calculated. Currently I am using Blocks 3.0 from Worden Brothers. I used to use Telechart but moved exclusively to Blocks because I love the ability to write in my own or C# code.

Check back for my explanation.



Anonymous said...

Hi Paul
I really find that the "collective" type of indicators seem to add a lot of value to timing decisions. I've been using stochastic counts for sp100 and nasd 100 for quite a while and find they are a good complement to individual indicators. Blocks support folks helped me considerably in adding a table to Blocks 2 with that data.

In Blocks 3 I just can't seem to easily get much done in that works.

I'd certainly would appreciate it if you would share that chart of market macd that you developed.

Bob Mc

Paul Stiles said...

Bob Mc,

Sure. Once you have this setup figured out, you will be able to apply to many different indicators.

Check back soon.